Seeking Alpha
Long/short equity, special situations, momentum, growth
Profile| Send Message| ()  

The Senate Democrats appear to have prevented a deal from being reached this weekend and so markets shall open Monday with no deal and in the red. Word out of Washington is that a deal is quite close, which is preventing further losses, but still, the market demands a deal and a deal still has not been reached. We are getting quite close to the day when the Treasury believes it will run out of money so we are sitting holding our breaths along with the rest of the market hoping for an 11th hour deal to save the U.S. from going over this cliff.

The whole ordeal is becoming quite taxing, from an investor's standpoint but also from an economic standpoint. The apparel retailers are not being helped by this uncertainty being injected into the economy and the Las Vegas casino operators who have large convention businesses are also experiencing some pain. As soon as this is over those sectors should see an uptick in business over the following months, but damage has been done, especially as it pertains to discretionary spending.

Chart of the Day:

The ten year Treasury rose to 3% in anticipation of a Federal Reserve tapering move which did not happen and subsequently fell back down to the 2.60% level. The past week or so has seen rates creep up a bit but most of that has happened on the short end and not to the same extent in the medium to longer term Treasuries.


(Click to enlarge)

Source: Yahoo Finance

We have no economic news today but will have some beginning tomorrow.

Asian markets finished lower today:

  • All Ordinaries -- down 0.43%
  • Shanghai Composite -- up 0.43%
  • Nikkei 225 -- CLOSED
  • NZSE 50 -- down 0.14%
  • Seoul Composite -- down 0.28%

In Europe, markets are trading mixed this morning:

  • CAC 40 -- down 0.26%
  • DAX -- down 0.21%
  • FTSE 100 -- up 0.12%
  • OSE -- up 0.33%

Reopening Government To Benefit Las Vegas ...

Some of the best performers since the financial crisis have been the casino names, which have seen their share prices rebound strongly due to their leverage to real estate and improving operating results. Those with operations in Asia and other fast growing areas, such as Las Vegas Sands (LVS) and MGM Resorts (MGM), have done even better but faced constant headwinds from the United States government from various shutdowns and legislation that prevented companies receiving TARP funds from participating in conventions or other business functions within destinations such as Vegas. It has been a constant headache, especially as the federal government is one of the larger convention attendees and also pays, via various grant programs, for both corporate and local government entities to participate in these meetings as well.

We would look for LVS to test the $70/share level with this latest move, but think that we need a general market rally based off of a deal in Washington being reached to make this happen. Any pullback of significance should be bought here.


(Click to enlarge)

Source: Yahoo Finance

Both Las Vegas Sands and MGM have continued to perform well through this government shutdown, as investors have looked to Asia and overseas for reasons to be bullish, but we think that what has been a headwind for the past month or so will soon turn into a tailwind as the debt ceiling is raised and spending approved to take U.S. at least six months out without any further self-inflicted debt crises. We have long been bullish on Las Vegas Sands and remain so right now. On days like today, when the market is disappointed that a deal in Washington has not been reached, we would be buyers on any pullback of significance.

The Retail Landscape Is Shifting ...

We are seeing a shift in the retail landscape take place right now and this is a big reason we have been urging readers to diversify their retail holdings by venturing into the retail ETFs and away from individual stocks. One of our longtime favorites and big winners, Gap (GPS), saw its shares lose over 7% of their value on Friday while trading on high volume after announcing a surprising 3% drop in same store sales for the month of September. Worse still, the weakness was seen across all three of the company's major brands and could indicate a weaker holiday season than is forecast.

With Gap being the latest victim to what has become a bear market, or maybe just unbearable market, for apparel retailers we are seeing a lot of attention shift towards the grocers and the performance they have been having in recent months. There has been a real consolidation wave in the sector over the past decade and this trend is continuing with Safeway (SWY) appearing to be one of the biggest beneficiaries. Many thought the supermarket chains such as Safeway would be put out of business with the entrance of the big discounters into the business, but that has not been the case. Rather the discounters chased out the weaker competitors and ended up splitting those consumers in many of the markets they entered. What transpired was that the lower margin shopper went to the discounters and the higher margin shoppers moved on to other grocery stores. That is the way it has played out in the south east United States and based off of the numbers it looks as though one could say this has been taking place nationwide. Also helping grocers like Safeway is the trend towards higher quality foods and store brands which both carry better margins.

What has really lit a fire under the company's shares recently is their reorganizing the business around their most profitable areas and focusing on their core business. The company announced that they were pulling out of Chicago and slimming down which seems to underscore the trend to seek out the higher margin business in the sector while surrendering those geographical areas or segments which serve no benefit.

Investors have lost that love and feeling for shares of Gap over the past few months and the latest same store sales figures did not help the situation at all. We think there is support at $36/share but still think that ETFs are the way to play the retail sector right now.


(Click to enlarge)

Source: Yahoo Finance

Revisiting Jos. A. Bank (JOSB), we found it interesting that Men's Wearhouse came out so quickly to decline the unsolicited offer. It appears that Jos. A. Bank was forced to go hostile so the company probably knew the offer was coming and had a response ready, but the deal appeared quite reasonable in our opinion and would have created a juggernaut in the men's apparel segment. These two are currently going head to head in many markets right now with Jos. A. Bank expanding into areas where Men's Wearhouse has traditionally had the market to themselves, and doing so in a big way. A combination would enable the two to close stores in saturated markets, lower advertising spending and better manage store openings. A combined company would no longer have the need to open three Jos. A. Bank stores in a new market which previously had some local retailers and one Men's Wearhouse location and that coupled with realized economies of scale would in our opinion provide better returns for shareholders. Look for another offer from Jos. A. Bank that has been sweetened over the next month or two. This deal makes too much sense to simply walk away from without another try.

Source: Today's Market: Casino Stocks To Rally, Diversify Retail Names